Transcription of Equal or Value Weighting? Implications for Asset-Pricing Tests
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Equal or Value Weighting? Implications for Asset-Pricing Tests
Equal or Value weighting ? Implications for Asset-Pricing TestsApril 2014 Yuliya PlyakhaUniversity of LuxembourgRaman UppalEDHEC Business SchoolGrigory VilkovMannheim University and Goethe University Frankfurt2 AbstractDoes the choice of weighting scheme used to form test portfolios influence inferences drawn from empirical Tests of asset pricing? To answer this question we first show that, with monthly rebalancing, an Equal - weighted portfolio outperforms a Value - weighted portfolio in terms of total mean return, four-factor alpha, and Sharpe ratio. We then explain that this outperformance is partly because the Equal - weighted portfolio has higher exposure to systematic risk factors; but, a considerable part (42%) of the outperformance comes from the difference in alphas, which is a consequence of the rebalancing to maintain constant weights in the Equal - weighted portfolio.
and value-weighting impact inferences when testing asset-pricing models? Our main contribution is to answer this question, which we do in three steps. First, we show that there is a substantial difference in the performance of equal- and value-weighted portfolios. Second, we identify the source of this difference in performance.
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